JABLANICKO LAKE, Bosnia, March 14 (Reuters) - Ramiz Memidzan, 66, was a young boy when he last saw the village where he was born in southern Bosnia, before dam construction and the creation of Jablanicko Lake in the 1950s covered the site with 30 metres of water.

This year he can see again the tomb stones of its Muslim graveyard and broken railway tracks - remnants that jut out of the mud following the worst drought in at least 40 years in the Balkans, which has left countries that rely on hydro power struggling to maintain a steady electricity supply.

The dams on the Neretva river near the lake feed a system that normally produces an average of 2,000 megawatt-hours of electricity per year, but the drought that began in August has shrunk output to just a quarter of that amount.

"I cannot recall when the lake has ever been so low," says Memidzan as his hand points to what is left of the reservoir, one of five that supply power to southern Bosnia.

"There are no fish left here," he adds, standing on his boat house, stranded in the mud.

Hydro power accounts for most of Albania's electricity output and about half of Bosnia's, followed by Croatia and Slovenia at 40 percent, Serbia at 30 percent and Montenegro at 17 percent. Kosovo mainly relies on coal.

The drought has forced cash-strapped nations to import more power at higher prices. Bosnia, normally the one net power exporter in the region, paid 20 million Bosnian marka (14.4 million) to import electricity in January, compared with January 2011 when it earned 70 million marka from power exports.

In February a blizzard and temperatures as low as minus 30 degrees Celsius combined with the drought to put such a strain on ageing energy infrastructure that it came close to buckling. Governments had to suspend energy supplies to businesses and limit residential use to keep the lights on.

"These problems are a clear indication of how urgently this sector needs investments," Bosnia's regional energy minister, Erdal Trhulj, said in an interview. "Had there been any natural gas cuts, the system would have collapsed."

Spot power prices in December and January were around 120 euros per megawatt hour and then soared above 150 euros during the February storm, Nenad Savic of trading and investment group Energy Financing Team said in an interview.

Prices have since receded to 55 to 65 euros but they are still higher than spot prices in Germany and countries further north, he added.

"There is a question whether the utilities will be able to recuperate from losses caused by drought and longer-than-expected outages," Savic said.

The heavy February snow will provide only a little relief to the dry conditions, with the spring melt not expected to lift reservoirs to normal levels, said Branislava Milekic, the general manager of Bosnia's second-largest utility, EPRS .

INVESTMENT NOT SO EASY TO FIND

New investment is needed in power plants and grids after the sector fell into disrepair during the Balkan wars of the 1990s.

Balkan states, as a part of their path to the European Union, furthermore have pledged to liberalize their energy sectors and achieve EU power generation standards by 2015, which will require outside expertise and financing.

Bosnia, Serbia and Croatia are each hoping to lure up to 10 billion euros ($13.1 billion) over the coming decade to invest in the grid, in new power plants to diversify supply sources and other projects.

Potential investors are hesitant, however, given that governments in the region like to keep a cap on power prices, fearing excessive increases could fuel inflation or trigger voter discontent.

That is not to mention obstacles such as red tape, regulatory uncertainty, a lack of legal transparency and the dominance of state-run utilities.

As an example, Bosnia's Serb Republic authorities have issued concessions for the construction of more than 120 small hydro-power plants in this autonomous region since 2005. So far only three have been built.

Bosnian businessman Ljubo Glamocic said he was awarded a concession to build a small hydro plant before a long process for securing a construction permit and problems in getting local bank funding forced him to scuttle the project.

"I had no other option but pull out and transfer the concession to another company," he said.

In normal years, the Balkan region's power generation capacity is already about 2,000 MW short of demand. Energy experts estimate that its demand will jump 50 percent in a decade.

"Unless their (government) policies are set right, the lights are going to go out," Ron Wood, the World Bank leading economist for the Western Balkans, told a recent conference. ($1 = 0.7610 euros) (Additional Reporting by Gordana Katana and Daria Sito-Sucic; Editing by Michael Kahn and Jane Baird)

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